Three Common Pitfalls in Tax Sale Purchases

March 23, 2017 - A. Parker Barnes III

By and large, South Carolina provides an excellent opportunity for those looking to buy property at tax sales. As South Carolina is not a tax lien state, buyers purchase an interest in land, rather than a lien. 

Investors usually receive anywhere from 3% - 12% back in interest or receive the deed outright on the property. For those looking for ROI in a short time period, tax sales are certainly something to consider. 

The potential for returns, however, are often times overshadowed by what could “go wrong.” The South Carolina Supreme Court, in Johnson v. Arbabi 355 S.C. 64, 69, 584 S.E.2d 113, 115-16 (2003), has “consistently held that tax sales must be conducted in strict compliance with statutory requirements.” There are a number of elements at play throughout the process, so before you consider whether investing at a tax sale is right for you, here are three pitfalls to consider: 

Don’t forget about federal tax liens. Under federal law, a federal tax lien attaches to real or personal property after the IRS makes a demand. The lien will last for 10 years, unless the IRS re-files a notice of the lien. 

What does this mean for tax sale investors? Generally speaking, if notice of the federal tax lien is filed in the county real estate records and the federal government is not given notice of the tax sale, the sale could be subject to the federal tax lien. This means that the federal tax lien would continue even after the property is sold. 

Review the HOA dues and obligations. Provisions that require property owners to pay dues to the HOA for improvements, maintenance or other services are generally considered contractual and binding obligations. 

What does this mean for tax sale investors? HOA dues provisions will be enforced on the property you purchase, unless they are indefinite or contravene public policy. In general, tax sale purchasers are liable for all HOA assessments incurred after the tax deed is recorded. 

Be wary of superfund liens. Established by Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), the Superfund program is designed to fund the cleanup of sites contaminated with hazardous substances and pollutants. Nearly 70% of Superfund cleanup is funded by potentially responsible parties through the use of Superfund liens.  

What does this mean for tax sale investors? Potentially responsible parties can be:

  • current owners or operators;
  • owners or operators of a site at the time a hazardous substance, pollutant, or contaminant was disposed;
  • persons who arranged for disposal of a hazardous substance, pollutant, or contaminant; or
  • persons who transported a hazardous substance, pollutant, or contaminant for disposal and who selected the site for such purpose.

Given the definition of potentially responsible parties includes current owners, buyers should assess the level of contamination and likely costs of recovery during the due diligence process. CERCLA imposes liability regardless of fault, so a buyer may be on the hook for payment of the Superfund lien in future.